Company bond yield spreads in the euro-zone’s peripheral countries surged to records versus benchmark government debt as the sovereign crisis infects corporate borrowers.
The extra yield investors demand to hold bonds of companies in countries such as Spain and Italy instead of German government debt widened 56 basis points in the past week to 419, Bank of America Merrill Lynch’s Euro Periphery Non-Financial Index. The gap has increased from an eight-month low of 241 basis points, or 2.41 percentage points, on March 20.
“It’s overdue,” said Geraud Charpin, a fund manager at Bluebay Asset Management Ltd. in London which oversees $42 billion. “If a country is in major trouble it’s going to have an impact on corporate borrowing and credit ratings. You can’t disassociate the sovereign risk from the corporate risk.”
Concern is building that companies will struggle to meet debt payments as the worsening fiscal crisis sends the euro region into a recession. Spain, which requested as much as 100 billion euros to support its banks on June 9, saw its government bond yields soar this week to levels at which Greece, Portugal and Ireland needed bailouts.
The value in dollars of the 128 bonds in Bank of America Merrill Lynch’s peripheral companies index fell $2 billion this month to $147 billion. The decline pushed the average yield to 5.1 percent from 4.55 percent, according to the gauge of 128 bonds issued by companies including Spain’s Red Electrica Corp. SA and Telecom Italia SpA.
Peripheral country corporate bonds lost 2 percent this month, more than the 0.1 percent loss on a broader index of European investment-grade corporate debt, Bank of America Merrill Lynch data show. High-yield, or junk, securities returned 0.8 percent since the end of May.
Yield spreads on peripheral country corporate bonds are still less than the 491 basis-point premium investors demand to hold securities issued by the governments of Spain, Italy, Ireland, Portugal and Greece, Bank of America Merrill Lynch data show. The last time the countries’ government debt yielded less than company bonds was April 2010.
Spanish government notes rose as the nation met its maximum target at a bill auction today. Yields on the country’s 10-year bonds fell 12 basis points to 7.04 percent.